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The Story So Far – Paywalls: Information at a Price

January 7, 2011

The question of whether to introduce a paywall or retain free access to Internet content is one that remain highly contentious in the world of traditional publications. The paywall issue is especially acute for newspaper sites.

Publishers usually cite three reasons to charge for online products. One, of course, is to increase subscription revenue. Another, less obvious, is to stanch the erosion in legacy operations: That is, since their readers now get the content they want for free online, why would they pay for a print subscription? If you start charging for digital access, shouldn’t that protect your more profitable print business? Finally, there is evidence that a paying audience is more valuable to advertisers because it demonstrates deeper commitment by those readers.

The decision-making processes at two large metro newspapers—the Dallas Morning News and the Miami Herald is examined in detail. Each thought about the same issues, relied on similar data—and then embarked upon completely different strategies.

Both papers have histories as journalistic powerhouses in their home markets, both have experienced significant declines in their print circulation, and both had reason to believe that their free websites might be partly to blame.

At the Herald, circulation declined from 393,382 in 2005 to 261,657 in 2009. The trend has been similar in Dallas, where the Morning News has dropped from 373,586 daily circulation in 2007 to 264,459 in 2010.

The Morning News were adamant that introducing a paywall was counterproductive until late 2010 when it became clear that an advertising rate of $7 CPM covers less cover less than a third of the editorial costs.

More fundamentally, the Morning News had concluded that a focus on volume—either in the form of cheap print subscriptions or of Web traffic that generated insufficient revenue—had damaged the news industry’s economic vitality.

The News launched an aggressive pricing scheme for its digital content in February 2011. It is a paywall, but not an absolute one. Stories that strike the editors as “commodity” journalism—such as breaking news, or weather and traffic updates that could easily be found elsewhere—are free to all. More proprietary or exclusive journalism requires a subscription.

In late April 2011, six weeks after the pay plan launched, the News did see traffic declines – though less, so far, than predicted. Unique visitors were down 17%, and page views declined 28%.

The Herald did a survey on its site in October 2009 to determine users’ willingness to pay for its content; less than 5 percent said they would spend more than $10 a month. Another survey question asked readers if they would make a “voluntary financial payment” and nearly a third said they were very or somewhat likely to do so. Based on this, the Herald’s site instituted a “tip jar” and over a period of 6 weeks received $1,000 to $2,000 total.

The Herald first modelled what would happen if it imposed a 99-cent monthly subscription for anyone to read anything on the site. The company predicted page views would fall by 91%, and total revenue from the site would drop by 76%. Further, at this rate, they would need 335,000 subscribers—about 30% more than the combined daily print circulation of the English- and Spanish-language newspapers.

After reviewing a number of scenarios, the Herald determined that the revenue boost from digital subscriptions would be less than $1 million a year, less than 1% of the company’s overall revenue, didn’t seem worth the investment in time, marketing and other costs.

One publisher whose digital subscription base has grown substantially is the Financial Times.

The growth is tied to a change in strategy. The FT toughened its policy in 2007 by preventing non-subscribers from getting any stories without registration and limiting them to 10 stories a month before the paywall rises. Rob Grimshaw, managing director of FT.com, says there is a more fundamental change at work: Managers “used to approach it as newspaper marketing;” now they realise they “are direct Internet retailers.”

They have developed a dynamic model to determine readers’ propensity to subscribe and as a result more than doubled the rate of acquisition while spending the same amount on marketing as they used to.

For the FT Group, 55 percent of its revenue comes from “content/subscriptions” while 45 percent comes from advertising. A decade ago, the FT earned 74 percent of its revenue from ads, and only 26 percent from subscriptions.

According to Grimshaw, “The outlook for the ad business online is quite bleak, there’s just not enough money there.”

The New York Times has also re-entered the realm of pay-for-access. In 2005, the Times launched its TimesSelect service, two years later they closed it down; executives said the $10 million a year the service was generating wasn’t enough to compensate for the lost traffic and ad revenue.

So why the change of heart? In 2005, the New York Times Media Group, generated nearly $1.9 billion in ad and subscription revenue; about a third of that came from circulation. Five years later, ad revenue had dropped by nearly $500 million. Today, circulation revenue for the group almost equals advertising revenue.

The Times introduced the revised paywall scheme in March 2011. In the Times’ own story on its plan, a senior editor called the plan “essentially a bet that you can reconstitute to some degree the print economics online.”

Newport Daily News, a 12,000-circulation newspaper in Rhode Island, takes an entirely different approach. In 2009, based on digital advertising rates they introduced the unusual model where print subscriptions were priced at $145 a year, print/online combos at $245 and online-only access would cost $345.

The rationale was simple – to drive people back to the printed edition.

In early 2011, the News dropped the price for print and online to $157, or a dollar a month above the print-only fee. But online-only access remains at $345. The amount was based on a scenario in which, “if everyone wanted only a digital product, this is what it would cost.”

AOL, launched a free Patch site in Newport in July 2010 and it’s too early to say what effect, if any, this will have on the Newport Daily News’ model.

So, which approach is best, free or paid?

Pay proponents often put it this way: High-quality journalism costs a great deal to produce, so users ought to pay to get it. Pay opponents have a counterargument: Paywalls cut sites off from “the conversation” online and will deprive them of the attention they need from blogs, aggregators and social media.

When framed as a business issue, it’s possible that neither side has it exactly right.

In the old world, people weren’t used to paying much for news; in the digital world, news organisations have spent 15 years training their consumers to be freeloaders. As a result, most people are happy to pay nothing at all for news, even as they have come to accept paying for other forms of digital content.

There is, in some publishers’ pay plans, an aura of frustration over the inability to convert large online audiences into advertising revenue. This is possibly because they’re basing the price on cost or history rather than value.

The best chance to make headway with pay schemes is likely with a device that people can hold in their hands. Consumers have shown a willingness to pay for content on mobile devices, whether that involves ringtones or sports videos.

Publishers may be best positioned to charge consumers on mobile devices that offer a more welcoming environment, not on the computers where they first gave away their wares.